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Alibaba by Duncan Clark (Part 2)

Burst and Back to China. There were other companies with the same ideas as Alibaba. Global Sources was preparing an IPO. Alibaba, in response, started hiring a lot of people. How is the Chinese government going to handle the Internet? Chinese regulators are known to regulate quickly. China knew that it needed to adapt to new technology to boost the economy. The venture capitalist market was in its infancy. The Chinese government knew that they could not stop the Internet’s rise. They created the VIE, variable interest entity. This allows foreign investors some control over revenues generated by a Chinese company through a complicated arrangement of contracts. Sina, NetEase and Sohu all had IPOs. However, they all didn’t do well as public companies. It was Mar 2000, the dot com crash was happening. A lot of market capitalisation was being wiped out quickly. A bubble formed and it was popping. Everything was crashing down. The party was truly over. Chinese tech IPOs could not be listed for the next 3 years. Jack attended trade shows and wanted to hire the best talents. Jack was attracting a lot of attention from the media. The 3 IPOs’ share price was hit badly. Jack Magic was wearing off. He hired 30 engineers to try and over-turn the company. Now, they decided on a B2C, back to China policy. Alibaba was slammed as they were not making money. MeetChina was not doing well too. Alibaba needed to find a way to make money and impress investors. At that time, Alibaba’s closest rivals was Global Sources. Alibaba started charging fees, however, their revenue was not growing fast enough. In 2001, they hired Savio Kwan as the COO. Jack was CEO, Joe was CFO, John was CTO and Savio was COO. Some employees were sacked in order to cut cost. Advertising was cut to reduce expenses. Alibaba was undergoing tough times and Jack was certainly worried. The 3 IPOs were now penny stocks. The fact that Alibaba was still private worked to their advantage. Thankfully, Alibaba rided out the difficult years of 2001 and 2002.

Born Again: Taobao and the Humiliation of eBay. Jack Ma hates eBay as a competitor, but admires it as a company. Now, he is a settler. Alibaba would move their HQ back from Shanghai to Hangzhou. 8848 was struggling. Now, Jack wanted to target the consumer e-commerce market. Despite 8848’s failure, Jack was not deterred. eBay was proving to successful. Shao Yibo wanted to be the eBay of China. He wanted to challenge EachNet. Bo was a genius at mathematics. I got to know Bo too. Bo was a humble guy. EachNet was getting a lot of investments and funding. Could the eBay model really work in China? In addition, China didn’t have a developed credit card market and courier services. Online payment was still years away, at the very least. EachNet explored the cash on delivery concept. In 2002, China UnionPay was launched. However, China’s legal system offered few protections for merchants. EachNet tried to create escrow services and copy PayPal. Unscrupulous vendors created fake accounts to dilute negative ratings. EachNet faced many issues. Later, EachNet sold a 33% stake to eBay. eBay was attracted by the allure of the Chinese market. eBay was slow to enter Japan and suffered greatly. Later, eBay acquired the whole of EachNet. They had 90% of China’s consumer e-commerce by then. However, in 2 years, they were driven out of China. Why did eBay fail in the end? Jack was scared that eBay would eat Alibaba’s business. This was when TaoBao was launched. SoftBank also managed to get rid of eBay from Japan. Jack strategized and thought of a plan to counter eBay. He wanted Alibaba to be portrayed as David vs the Goliath, eBay. TaoBao was launched on May 10, 2003. SARS broke out in 2002. Many employees had to undergo isolation. Jack inspired the troops during difficult times. The virus boosted online sales and there were less retail sales. Internet usage spiked when people were at home. Initially, many people did not know that Taobao and Alibaba were even related. However, over time, people knew and were surprised. Taobao used guerrilla marketing techniques to reach out to small sites. This proved to be very effective indeed. It would be years before TaoBao could make money. Softbank pumped even more funds into Alibaba. Goldman sold their stake, way too early. eBay still thought Taobao was very small. China was the next big thing. eBay thought that whoever wins China, wins the world. The merchants were pissed at high commissions charged by eBay. eBay got the culture wrong and thought that experts in the US could solve everything. However, they didn’t understand the local market. Their website design also left much to be desired. Taobao was a website built for the Chinese people. Taobao also understood merchants’ needs better. EachNet started charging listing fees to sellers. TaoBao didn’t charge, but had to think of ways to earn money. This was their winning move as during the initial stages, people didn’t want to pay to have things listed. Customer service on Taobao is excellent. eBay also moved their servers over to the US. However, information and traffic is screened before entering China. Hence, some user information ended up being blocked. Migration of servers turned out to be a bad mistake. The website lagged ever more. eBay was not very strong in technology and could not manage various website changes. There was too much red-tape in eBay. Taobao’s execution was better and that killed eBay. There were 2,000 employees in Taobao in 2004. The ant was their mascot. eBay could not manage payment properly. Alipay was launched in 2003. The escrow model established trust . PayPal came up with the solution, but they were too late. PayPal was also sued in the US, causing more problems. Alipay was still continuously improving. Taobao wins because they pay attention to user experiences. eBay tried to buy Taobao, but failed. eBay thought that investing large sums of money into China would gain them a victory. Even when eBay tried to introduce Paypal in China, they failed. eBay bought Skype for $2.6 billion. eBay’s market share of China e-commerce dropped to less than 30%. Alibaba is essentially the combination of eBay, PayPal and Amazon.

In the US, if you place a bid on eBay, it’s a contract, and by law you need to fulfil that bid if you win the auction. That’s very clear. People would be afraid of getting sued if they did not abide by that contract. In China people don’t care: “I place a bid, I don’t want it anymore, tough luck.” – Duncan Clark

There is no treasure that cannot be hunted out, and there is no treasure that cannot be sold. – Taobao Tagline

eBay may be a shark in the ocean, but I am a crocodile in the Yangtze River. If we fight in the ocean, we lose, but if we fight in the river, we win. – Jack Ma

If you use money to solve problems, why on earth would the world need businessmen anymore. Businessmen understand how to use the smallest resources to expand – Jack Ma

Whatever is stronger than you, you have to learn not to hate it… When you treat it too seriously as a rival, and intend to kill it, your techniques are completely exposed. Hatred only makes you a shortsighted person. – Jack Ma

Yahoo’s Billion-Dollar Bet. Yahoo would also fall behind until they struck a deal with Alibaba. Jerry Yang was popular in China. When he went to the US, he didn’t know much English at all. However, he had good grades in school. Jerry and Dabid were very close. By 1995, Yahoo had millions of hits. Sequoia invested $2million for a 25% share of the company at the start. Son also pumped in money to buy a 41% sstake. SoftBank saw the potential of Yahoo. Yahoo went public in 1996. Yahoo didn’t want to venture into China yet and started to target Southeast Asia. Yahoo knew it would be tricky trying to enter China. However, since Jerry was from Taiwan, China wasn’t too pleased at Yahoo’s expansion plans. Yahoo was finally launched in China. China was adamant that Yahoo be curbed and not expand. Yahoo’s content was boring compared to Sina, NetEase and Sohu. These 3 would eventually fall to Baidu, Alibaba and Tencent. Tencent harnessed content to cell phones and online games. It was launched in 1998 – Pony Ma. It cloned the ICQ, an instant messaging client. It was renamed as QQ. Their mobile business took off in a big way. However, they are also huge in online gaming. Now, the market capitalization is over 200 billion. Tencent also owns WeChat. Baidu was founded by Robin and Eric. Baidu was founded in year 2000. It was like a search engine. Initially it wasn’t profitable. Their core focus was on the search engine. Google even invested $5 million in it. It is China’s largest search engine. Yahoo partnered with Baidu. However the deals turned out to be major flops. It later bought 3721 networks. Zhou Hongyi is the founder of 3721 networks. He was an aggressive and wild child. However, the integration plan with 3721 didn’t work out. Zhou and Yahoo had some management disagreements which could not be resolved. Yahoo didn’t recognize the threat of Google then. Their search engine was better and more powerful. Zhou criticized Yahoo heavily and blamed their corporate culture. Now, the big move arrived. Jerry gave Jack $1 billion for a 40% stake in Alibaba. Yahoo initially wanted to invest in Sina, but it got rejected. It was a leap of faith as Alibaba was not making money then. Yahoo was a beneficiary of that investment. Jack, Jerry and Masayoshi Son formed the Golden Triangle Some of the employees managed to cash out and earn large sums of money. The ownership was like this 40% Yahoo, 30% Softbank, 30% existing management. Some of the Alibaba employees didn’t like this new deal. China Yahoo was in trouble from Baidu and Google. The $1 billion deal helped provide the ammo for Alibaba to compete with eBay. The search engine aspect of the Yahoo-Alibaba was failing. Zhou tried to poach people from Yahoo. The case of imprisoned Chinese journalist, Shi Tao, also caused Yahoo much negative publicity. Google closed up most of its China operations in 2010. Not only were there regulatory challenges, there was also the big boys like Alibaba, Baidu and Tencent. None of the Western companies succeeded in China between the period 2000 to 2010. It is better to be a merchant than a missionary.

Growing Pains. eBay exited China in 2006. Tencent was doing well. David Wei would later serve as CEO of Alibaba.com for more than 4 years. The plan was just to list Alibaba.com, a B2B business. It was November 2007. Many simply bought the stock without understanding what it was about. Much of the shares were sold to institutional investors. Yahoo bought 10% of the offering. The company was valued at $9 billion. Taobao was still losing money. Alipay was also losing money as well. Jack bought a $36 million home in Hong Kong, in Victoria Peak. Then the US economy was badly hit and Alibaba’s exports were hit badly. The share price plummeted. However, after the crisis, the company emerged stronger. Alibaba slashed subscription rates during the crisis. They tried to offer the customer even more value-added services. Finally, Taobao sold merchant advertising space to help tem promote their goods. A new cloud computing subsidiary, Aliyun, was also launched. Later, Alibaba would delist from the HK stock market. Consumer e-commerce was doing very well now. Microsoft offered to buy Yahoo for $44.6 billion in 2008. Microsoft and the Chinese government didn’t have a great relationship. Jerry Yang rejected Microsoft’s offer. Their share price plummeted. Many investors saw this as a dumb move by Yahoo. Jerry left Yahoo because of this. Carol Bartz would be the new CEO of Yahoo. Jack didn’t have a good relationship with Bartz. Alibaba wanted to buy back Yahoo’s stake in the company. Many in Alibaba wanted to end the partnership. Carol was fired in September 2011. Fraud was discovered among Alibaba employees in 2011. This damaged consumer trust in a great way. Jack wanted Alibaba’s CEO to step down, which he eventually did. Who owned the Alipay business? It was owned by Zhejiang Alibaba E-commerce company limited, which Jack controlled. It was previously owned by Alibaba Group but got restructured after that. Alibaba’s share price fell after this piece of news. They did not seek approval of board of directors or shareholders. It was now in Chinese ownership. Yahoo didn’t tell their investors about this transfer. Jack argued that he could foresee future regulations which would deny foreign-invested companies. PBOC later issued a license to Alipay. Many people hated this VIE investment structure. Many payment companies in China had to close because they couldn’t obtain the license. PBOC’s rules were very vague. Yahoo and Alibaba’s frosty relationship didn’t help at all. Jack was slammed for this transfer as it appeared to be in his benefit. Jack also had disagreements between Son on a range of HR issues, which were difficult to resolve. Jack believed in treating customers well . Son didn’t believe in giving shares to his employees, like in Japanese culture. Finally, Yahoo was compensated for the transfer. Now, Alibaba was focused on buying back Yahoo’s stake. In 2012, Alibaba paid $7.1 billion to buy back half of Yahoo’s stake, or 20% of Alibaba. Now, Jack was planning other IPOs of the Alibaba group.

Raise money when we don’t need it. When you need it don’t go out to raise money, it’s too late. – Jack Ma

Icon or Icarus. IPO 2.0 was emerging. It is September 2014. Jack and team were making a pitch. There were many investors at the event. He discussed the risk factors the VIE investment structure. Alibaba’s structure allowed a lot of co-founders and formed a partnership. HK banned them from listing. The partners all wanted control of the company. Alibaba decided to list in NYSE instead. It raised $25 billion for 12% stake in the public markets. This was the largest IPO in history. The interesting thing was that you would purchase shares in Alibaba Group Holdings Limited, a company incorporated in the Cayman Islands. However, they did not actually own business assets in China. 90% of the shares were for institutional investors. The company was valued at over $230 billion, more than Coca-Cola. Later, Jack bought a $190 million house in Victoria Peak again. However, in later 2015, the share price plummeted drastically. Why did the share price fall? There was a dispute between Alibaba and the Chinese government agency. Alibaba was accused of selling fake goods and that its employees were taking bribes. Its policing policy wasn’t effective enough to prevent the fakes. SAIC released the report in public, affecting Alibaba’s reputation. Alibaba’s sales figures didn’t hit analyst targets, causing the share price to fall further. SAIC finally deleted the report and Alibaba vowed to police against illegal merchants. Jack respected the governments’ actions. Alibaba introduced a lot of measures to counter pirates. Eliminating piracy is a massive task. They have an Internet Security Team as well. The company also harnesses big data to help them track pirates. Taobao is involved in some lawsuits as well. Fake trades were present too. This happens when merchants ship empty boxed to ghost customers to boost their rankings. There are also click farming companies and fake reviewers. Alibaba is also facing competition. Alibaba pay $4.5 billion to buy a stake in Suning, an electronic goods retailer. JD.com is closely modelled after Amazon and operates its own logistics network. Jack is at swords with JD’s founder, Richard Liu. JD is backed by Tencent. WeChat is also posing a problem for Taobao. It is an unbelievable app that can do it all. Alibaba is also trying to shift its business model to mobile. The mobile wallet is causing huge competition for Taobao. WeChat has WeBank and can offer loans to consumers on their phones. Didi Juaidi is competing with Uber. Alibaba upgraded its office in Beijing. Alibaba is trying to cultivate government support. Jack has his own private equity fund, Yunfeng Capital. It is like a ‘billionaire’s boys club’. They all focus on companies in Zhejiang or Shanghai. However, deals between Alibaba and Yunfeng-related companies pose problems. Some of these transactions are not fully explained. Cloud computing is important for Alibaba, similar to Amazon Web Services. Jack believes in the power of Big Data. There is even a data centre established in Singapore. There are also rural kiosks built in rural areas. They plan to enter this market too. JD.com isn’t ignoring this potential group of customers too. AliExpress was launched in 2010, connecting sellers in China with consumers overseas. Russia accounts for 20% of AliExpress’s sales. Alibaba aims to grow in Western Europe. They are opening ‘business embassies’ overseas too. They also see US as a key market. Cross-border trade is something that Alibaba is now focusing on. Jack Ma has revealed that he doesn’t want to invade the US. After you take your business public, life is more difficult as you face shareholder pressure. Jack is now concerned about environment and health care too. Urbanization has caused havoc for the environment. Cancer is a major issue nowadays

Alibaba health has also emerged. Jack is also concerned with taking care of the younger generation. He sees sports and entertainment as the way forward. Alibaba also invests in film. It has its own streaming service also. Alibaba is also aiming to promote home-grown content. Jack wants Alibaba to be the entertainment company of the world. It can use Alipay to understand what moviegoers are looking for. Jack is concerned that foreigners are not portraying China in a good light, that it is a Communist country etc. Alibaba has found itself being scrutiny after it has become bigger. Alibaba is also venturing into finance and media.

Online or offline, fighting piracy is like a game of Whack-A-Mole: Whack one molehill, and the moles will pop up somewhere else. – Duncan Clark

Chinese people use to feel a sense of pride for being the world’s factory. Now everyone realizes what it costs to be that factory. Our water has become undrinkable, our food inedible, our milk poisonous, and worst of all, the air in our cities is so polluted that we often cannot see the sun. – Jack Ma